Baucus: A bank tax is coming

It was a short hallway conversation but spoke volumes about the dilemma facing Democrats, hungry for new revenues after emptying the cupboard on health care reform.

“I don’t think there’s much doubt that there will be a bank tax,” Senate Finance Committee Chairman Max Baucus told POLITICO. And more than ever, the Montana Democrat signaled that Congress will also crack down on wealthy hedge fund and private equity partners who shelter their income as capital gains — taxed at half the top 35 percent rate.

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Three times in recent years, the House has voted to rein in the so-called carried interest provision — only to meet Senate resistance. That’s changing with the pressure to find revenues to pay for other priorities such as a $35 billion measure extending popular tax provisions for businesses and families.

“I’ve asked my staff to look at alternatives ... Carried interest will probably be part of the offsets,” said Baucus. “We were thinking of putting it on later as part of tax reform. But we’re here; we’re here now.”

Wealthy Democratic donors are sure to scream; Baucus concedes he could face opposition from his own party moderates. But isn’t the chairman himself the “very soul of the moderate Democrat?” a reporter asks. “I’m a ‘Do-the-Right-Thing’ Democrat,” Baucus grinned.

Doing the right thing isn’t easy in today’s tax-writing world — whipsawed by record deficits, new “pay-go” budget rules, restless voters and a legacy of Bush-era tax breaks due to expire in December. Even the giant financial reform bill, facing its first Senate test Monday night, has potential revenue problems. And Baucus was sorely frustrated last December, when the Senate let the estate tax expire — thereby costing Treasury billions.

At least three major tax-related battles are taking shape in the next few months:

First and most immediate is how to pay for the long-delayed extenders bill, which Democrats want to complete by Memorial Day and which includes a must-pass provision authorizing long-term unemployment benefits past the November elections. Health care picked clean most of the planned revenue offsets in the initial bills, leaving a $35 billion hole and carried interest — worth $24.6 billion over 10 years — standing alone in this game of musical chair offsets.

Second — and fast closing — is President Barack Obama’s proposed bank tax. Baucus wants to keep the bank levy separate from the current debate over financial reform, thereby having the chance to claim the tax revenues as an offset. But the Congressional Budget Office is raising red flags that the Senate reform package will be $17 billion in the red if Democrats drop a $50 billion industry-financed “orderly liquidation fund” opposed by Republicans.

Third, but scarcely least, is this summer’s battle over Bush-era income tax cuts due to expire at the end of this year. The Senate Budget Committee last week approved a five-year plan that assumes the most popular middle-class tax breaks will be made permanent. House Democrats say some extension could be a powerful engine for a revenue bill prior to the elections; part of the mix would be some compromise on the estate tax issue, which splits the party in the Senate.